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FINANCIAL ASSETS
Chapter
7
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How Much Cash Should a BusinessHave?
How Much Cash Should a BusinessHave?
$
Everybusiness
needsenough
cash to pay
its bills!
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How Much Cash Should a BusinessHave?
How Much Cash Should a BusinessHave?
Cash
Short-term
Investments
Receivables
Financial
Assets
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How Much Cash Should a BusinessHave?
How Much Cash Should a BusinessHave?
Accounts
receivable
Maretablesecuritiesshort-term
investments"
Cash and cashe#uivalents"
Collectionsrom
customers Cashpayments
%E&cess'cash is
invested
temporarily
Investmentsare sold as
cash is
needed
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The Valuation of Financial Assets
The Valuation of Financial Assets
Estimated collectible amount
Estimated collectible amount
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Cash
Cash
Coins andpaper money
Checs
Money orders
(ravelers) checs
*an creditcard sales
Cash isdeined as
any depositbans +ill
accept,
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The Statement of Cash FlowsThe Statement of Cash Flows
Summaries cash
transactions or anaccounting period,
Statement o Cash Flo+s
Includes cash and cash
e#uivalents,
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Using Ecess Cash Balances Efficientl!Using Ecess Cash Balances Efficientl!
Cash available orlong-term investment
may be used to inance
gro+th and e&pansiono the business. or to
repay debt,
Cash not needed orbusiness purposes
should be distributedto the company)sstocholders,
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Cash "ve# and Sho#tCash "ve# and Sho#t
Cash /ver and Short is debited or shortagesand credited or overages,
Cash /ver and Short is debited or shortagesand credited or overages,
/n May 0. 1*AR. Inc,)s cash dra+er +ascounted and ound to be $23 over,
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Ban$ StatementsBan$ Statements
Sho+s the beginning ban balance.deposits made. checs paid. other
debits and credits in the month. andthe ending ban balance,
*an
Statement
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%econciling the Ban$ Statement%econciling the Ban$ Statement
E&plains the dierence bet+een cashreported on ban statement and cash
balance in depositor)s accountingrecords,
4rovides inormation orreconciling 5ournal entries,
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%econciling the Ban$ Statement%econciling the Ban$ Statement
*alance per *an
6 7eposits in (ransit
- /utstanding Checs
8 *an Errors
9 Ad5usted *alance
*alance per 7epositor
6 7eposits by *ancredit memos"
- Service Charge- :SF Checs
8 *oo Errors
9 Ad5usted *alance
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%econciling the Ban$ Statement%econciling the Ban$ Statement
All reconcilingitems on the
boo sidere#uire anad5usting
entry to thecash account,
*alance per 7epositor
6 7eposits by *ancredit memos"
- Service Charge- :SF Checs
8 *oo Errors
9 Ad5usted *alance
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%econciling the Ban$ Statement%econciling the Ban$ Statement
Prepare a July 31 bank reconciliation stateentan! the resultin" #ournal entries $or the%ions Copany& 'he July 31 bank
stateent in!icate! a cash balance o$ (9)610)*hile the cash le!"er account on that !atesho*s a balance o$ (7)430&
+!!itional in$oration necessary $or thereconciliation is sho*n on the ne,t pa"e&
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utstan!in" checks totale! (2)417&
+ (500 check aile! to the bank $or !eposit ha!
not reache! the bank at the stateent !ate& 'he bank returne! a custoer.s /% check $or
(225 receie! as payent o$ an accountreceiable&
'he bank stateent sho*e! (30 interest earne!on the bank balance $or the onth o$ July&
Check 781 $or supplies cleare! the bank $or (268
but *as erroneously recor!e! in our books as(240&
+ (486 !eposit by +ce Copany *aserroneously cre!ite! to our account by the bank&
utstan!in" checks totale! (2)417&
+ (500 check aile! to the bank $or !eposit ha!
not reache! the bank at the stateent !ate& 'he bank returne! a custoer.s /% check $or
(225 receie! as payent o$ an accountreceiable&
'he bank stateent sho*e! (30 interest earne!on the bank balance $or the onth o$ July&
Check 781 $or supplies cleare! the bank $or (268
but *as erroneously recor!e! in our books as(240&
+ (486 !eposit by +ce Copany *aserroneously cre!ite! to our account by the bank&
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%econciling the Ban$ Statement%econciling the Ban$ Statement
*alance per ban statement. ;uly 23$Additions?
7eposit in transit 033
7eductions?
*an error @>$
/utstanding checs B.@2C B.=3
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%econciling the Ban$ Statement%econciling the Ban$ Statement
E:ERAF ;/GR:AF
7ate Account (itles and E&planation 7ebit Credit
;ul
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Sho#t&Te#m 'nvestmentsSho#t&Te#m 'nvestments
*ondInvestments
Capital StocInvestments
Current Assets
Almost Asi#uid As Cash
ReadilyMaretable
MaretableSecurities
are , , ,
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et)s turn our
attention to accountsreceivable,
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Uncollecti(le AccountsUncollecti(le Accounts
$ a copany akes cre!itsales to custoers) soe
accounts ineitably *illturn out to be
uncollectible&
$ a copany akes cre!it
sales to custoers) soeaccounts ineitably *ill
turn out to be
uncollectible& 4AS( 7GE
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%eflecting Uncollecti(le Accounts inthe Financial Statements
%eflecting Uncollecti(le Accounts inthe Financial Statements
+t the en! o$ each perio!) recor!an estiate o$ the uncollectible
accounts&
+t the en! o$ each perio!) recor!an estiate o$ the uncollectible
accounts&
Contra-asset accountContra-asset account
Selling e&penseSelling e&pense
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The Allowance fo# )ou(tful AccountsThe Allowance fo# )ou(tful Accounts
Accounts receivable
ess? Allo+ance or doubtul accounts:et realiable value o accounts receivable
'he net realiable alue is the aount o$accounts receiable that the business e,pects
to collect&
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*#iting "ff an Uncollecti(le Account%eceiva(le
*#iting "ff an Uncollecti(le Account%eceiva(le
hen an account is !eterine! to be uncollectible) it nolon"er uali$ies as an asset an! shoul! be *ritten o$$&
hen an account is !eterine! to be uncollectible) it nolon"er uali$ies as an asset an! shoul! be *ritten o$$ &
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*#iting "ff an Uncollecti(le Account%eceiva(le
*#iting "ff an Uncollecti(le Account%eceiva(le
+ssue that on January 5) -a, !eterine!that Jason Clark *oul! not pay the (500 he
o*es&
-a, *oul! ake the $ollo*in" entry&
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*#iting "ff an Uncollecti(le Account%eceiva(le
*#iting "ff an Uncollecti(le Account%eceiva(le
+ssue that be$ore this entry) the +ccountseceiable balance *as (10)000 an! the
+llo*ance $or oubt$ul +ccounts balance *as
(2)500&
:et.s see *hat e$$ect the *rite-o$$ ha! on these
accounts&
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*#iting "ff an Uncollecti(le Account%eceiva(le
*#iting "ff an Uncollecti(le Account%eceiva(le
*eore
Hrite-/
Ater
Hrite-/
Accounts receivable 23.333$ =.033$ess? Allo+, or doubtul accts, B.033 B.333
:et realiable value C.033$ C.033$
:otice that the $033 +rite-o did not change the netrealiable value nor did it aect any income
statement accounts,
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Monthl! Estimates of C#edit +ossesMonthl! Estimates of C#edit +osses
+t the en! o$ each onth)ana"eent shoul!
estiate the probableaount o$ uncollectibleaccounts an! a!#ust the +llo*ance $or oubt$ul
+ccounts to this ne*estiate&
+t the en! o$ each onth)ana"eent shoul!estiate the probable
aount o$ uncollectibleaccounts an! a!#ust the +llo*ance $or oubt$ul
+ccounts to this ne*estiate&
(+o Approaches to Estimating
Credit osses?
2, *alance Sheet Approach
B, Income Statement Approach
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Estimating C#edit +osses , TheBalance Sheet A--#oach
Estimating C#edit +osses , TheBalance Sheet A--#oach
ear-end Accounts Receivable isbroen do+n into age
classiications,
ear-end Accounts Receivable isbroen do+n into age
classiications,
Each age grouping has adierent lielihood o being
uncollectible,
Each age grouping has adierent lielihood o being
uncollectible,
Compute a separate allo+ance oreach age grouping,
Compute a separate allo+ance oreach age grouping,
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Estimating C#edit +osses , TheBalance Sheet A--#oach
Estimating C#edit +osses , TheBalance Sheet A--#oach
At 7ecember
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Estimating C#edit +osses , TheBalance Sheet A--#oach
Estimating C#edit +osses , TheBalance Sheet A--#oach
At 7ecember
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Estimating C#edit +osses , TheBalance Sheet A--#oach
Estimating C#edit +osses , TheBalance Sheet A--#oach
At 7ecember
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EastCo)s unad5usted balancein the allo+ance account is
$033,
4er the previous computation.the desired balance is $2.
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et)s loo at
another +ayto estimate
credit losses!
et)s loo atanother +ayto estimate
credit losses!
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Estimating C#edit +osses , The'ncome Statement A--#oach
Estimating C#edit +osses , The'ncome Statement A--#oach
Gncollectible accounts)percentage is based on actualuncollectible accounts rom
prior years) credit sales,
Focus is on determining the amount to
record on the income statement asGncollectible Accounts E&pense,
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Estimating C#edit +osses , The'ncome Statement A--#oach
Estimating C#edit +osses , The'ncome Statement A--#oach
:et Credit Sales
J Estimated GncollectibleAmount o ;ournal Entry
:et Credit Sales
J Estimated GncollectibleAmount o ;ournal Entry
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Estimating C#edit +osses , The'ncome Statement A--#oach
Estimating C#edit +osses , The'ncome Statement A--#oach
n 2005) ;astCo ha! cre!it sales o$ (60)000&
(60)000 ? &01 @ (600A
/o*) prepare the a!#ustin" entry $or
eceber 31) 2005&
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Estimating C#edit +osses , The'ncome Statement A--#oach
Estimating C#edit +osses , The'ncome Statement A--#oach
7 38
ll i(l
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Uncollecti(le AccountsSumma#!
Uncollecti(le AccountsSumma#!
Aging oReceivables
Aging oReceivables
Emphasis onRealiable Kalue
Emphasis on
Realiable Kalue
Accts,Rec, All, or
7oubtul
Accts,
*alance SheetFocus
*alance SheetFocus
J o Credit SalesJ o Credit Sales
Emphasis onMatching
Emphasis on
Matching
SalesGncoll,Accts,
E&p,
IncomeStatement Focus
IncomeStatement Focus
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f A i (l
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%ecove#! of an Account %eceiva(le.#eviousl! *#itten "ff
%ecove#! of an Account %eceiva(le.#eviousl! *#itten "ff
E:ERAF ;/GR:AF
7ate Account (itles and E&planation 7ebit Credit
Accounts Receivable !1 Customer" $$$$
Allo+ance or 7oubtul Accounts $$$$
Cash $$$$
Accounts Receivable !1 Customer" $$$$
Subse#uent collections re#uire that the original +rite-o entry bereversed beore the cash collection is recorded,
Subse#uent collections re#uire that the original +rite-o entry bereversed beore the cash collection is recorded,
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A promissory note is an unconditional promise in+riting to pay on demand or at a uture date a deinite
sum o money,
A promissory note is an unconditional promise in+riting to pay on demand or at a uture date a deinite
sum o money,
/otes %eceiva(le and 'nte#est %evenue /otes %eceiva(le and 'nte#est %evenue
akerBthe person *hosi"ns the note an! therebyproises to pay&
PayeeBthe person to *hopayent is to be a!e&
akerBthe person *hosi"ns the note an! thereby
proises to pay&
PayeeBthe person to *hopayent is to be a!e&
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4R/MISS/R :/(E
Location Date
ater this date
promises to pay to the order o
the sum o +ith interest at the rate
o per annum,
signed title
Miami. Fl :ov, 2. B330
:inety days 4orter Company
John Caldwell
Lall Company
$23.333,33
2B,3J
C) Porter Copany
/otes %eceiva(le and 'nte#est %evenue /otes %eceiva(le and 'nte#est %evenue
4orter Company is replacing an e&isting Accounts Receivable
+ith this :ote Receivable +ith Lall Company,
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/n :ovember 2. B330. Lall Company +ouldmae the ollo+ing entry,
/otes %eceiva(le and 'nte#est %evenue /otes %eceiva(le and 'nte#est %evenue
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Interest is a charge made or theuse o money,
(he borro+er incurs interest
e&pense,
(he lender earns interestrevenue,
Interest is a charge made or theuse o money,
(he borro+er incurs interest
e&pense,
(he lender earns interestrevenue, Interest
rates
do+n!
/otes %eceiva(le and 'nte#est %evenue /otes %eceiva(le and 'nte#est %evenue
:en!er
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(he interest ormula includes three variables? (he interest ormula includes three variables?
Interest 9 4rincipal Interest Rate (imeHhen computing interest or one year. %(ime'e#uals 2, Hhen the computation period is less
than one year. then %(ime' is a raction,
Hhen computing interest or one year. %(ime'e#uals 2, Hhen the computation period is less
than one year. then %(ime' is a raction,
/otes %eceiva(le and 'nte#est %evenue /otes %eceiva(le and 'nte#est %evenue
For e&le. i +e needed to compute interest or< months. %(ime' +ould be
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Hhat entry +ould Lall Company mae on7ecember 3 N3 9 $B33
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Hhat entry +ould Lall Company mae onthe maturity dateO
Hhat entry +ould Lall Company mae onthe maturity dateO
/otes %eceiva(le and 'nte#est %evenue /otes %eceiva(le and 'nte#est %evenue
$23.333 2BJ =3 N3 9 $
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I 4orter Company deaulted on the note.Lall Company +ould mae the ollo+ing
entry on the maturity date,
I 4orter Company deaulted on the note.Lall Company +ould mae the ollo+ing
entry on the maturity date,
/otes %eceiva(le and 'nte#est %evenue /otes %eceiva(le and 'nte#est %evenue
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End of Cha-te# 7End of Cha-te# 7